The Financial Industry Regulatory Authority has sent a proposed rule change to the Securities and Exchange Commission to amend FINRA Rule 2210 (Communications with the Public) to allow a broker-dealer to project the performance or provide a targeted return with respect to a security, a securities portfolio, or an asset allocation or other investment strategy in its communications, subject to specified conditions.
The amendments "help align broker-dealer communications and marketing materials with the principles-based standards for investment advisers under the SEC's marketing rule," Ben Marzouk, partner at Eversheds Sutherland in Washington, told ThinkAdvisor in an email. "These proposed changes (which are actually a revised re-proposal of an earlier attempt to amend Rule 2210) allow for broker-dealers to show performance projections, subject to certain limitations, and importantly do not restrict the use of these projections to institutional investors only."
FINRA's plan refers to "projected performance," added Brian Rubin, also a partner at Eversheds Sutherland in Washington, "which are estimates of future security or portfolio performance, and 'targeted returns,' which are stated return objectives or targets."
The plan is about "forward looking, hypothetical performance," Rubin continued. For instance, "a private fund pitch aiming for a '15% annual internal rate of return' or a tool showing projected asset allocation growth over time based on stated assumptions."
FINRA states that it determined that further alignment with the IA marketing rule's provisions "governing hypothetical performance will help investors, including by reducing investor confusion and enabling them to receive additional information when making investment decisions, and increase regulatory harmonization while maintaining investor protection safeguards."
Currently, Rule 2210 prohibits projections of performance or targeted returns in member communications, with some exceptions. Examples of allowed projections include savings calculators, tools used to calculate the probability of an investment outcome, and securities price targets in research reports, according to FINRA.
"The proposed rule change would allow a member to project the performance or provide a targeted return with respect to a security, a securities portfolio, or an asset allocation or other investment strategy in its communications, subject to specified conditions to ensure these projections are carefully derived from a sound basis," FINRA states.
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